Jun

2

What would the impact of a strong economic employment report be? One dares to contemplate.

James Lackey answers:

The DC fear trade. I'd like to believe that another round of foreclosures or the always predicted disaster in commercial real estate is factored like GM vs LEH, but god forbid if the men get cut off from DC and have to go it alone. Just the fear of abandonment will cause the blizzard of double dip recession stories in the hopper to be front page news.

Rudolf Hauser replies:

I have no idea how the market would react to a favorable employment report this Friday both because I do not know what overall market expectations are or the question regarding recovery potential vs. inflation issues. However, with regard to your comment on inflation and the quantity theory of money, my view is a bit more complex. What is inflationary is the creation of money in excess of the demand therefor at a non-inflationary economy. The demand reflects not only the level of real output, the existence of near money substitutes and their degree of moneyness, inflation expectations and general fear levels, etc. Those fear levels probably are an important factor here. When fear diminishes the higher level of the quantity of money outstanding, which might have been consistent with no or negative inflation during the crisis, could become inflationary. An additional factor to consider is that the pressure to get rid of inventory and to bring in revenues to avoid making difficult decisions such as laying off long-term employees might drive prices below the point of long-term profitability. There would have to be a rebound in such price declines to levels of real profitability before real output potential could be realized. What is the more serious risk is that the government's policies might reduce the real growth potential of the economy with the result that the same growth in money that might have been non-inflationary in an economy with the prior incentive structure and level of impediments to economic growth and full employment would now become inflationary.